DCIT Central Circle-29, Delhi V. Kolkata Hotels Ltd. , Delhi

ITA 429/DEL/2022

AI Insights

The case involves the Deputy Commissioner of Income Tax, Central Circle-29, New Delhi (Appellant) against M/s Kolkata Hotels Limited (Respondent) concerning the assessment year 2017-18. The primary issue was the addition made under Section 56(2)(viib) of the Income Tax Act, which pertains to the taxation of share premium received by a company. The Assessing Officer (AO) had rejected the valuation method used by the assessee, which was the Discounted Cash Flow (DCF) method, and had instead applied the Net Asset Value (NAV) method, leading to a higher valuation and tax liability. The CIT(A) reversed the AO's decision, which was contested by the revenue in this appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 130431 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 5 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-05-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 02-03-2022
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value; Difference of opinion; Change of opinion
• Section: 68; 148; 143(3); 13

Judgement Text

Page 1 of 13 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘C’: NEW DELHI BEFORE, SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No.429/Del/2022 (ASSESSMENT YEAR 2017-18) Dy.CIT Central Circle-29 New Delhi Vs. M/s Kolkata Hotels Limited 4828/24, Prahalad Lane Ansari Road,Darya Ganj Delhi-110 055 PAN-AACCK 0653J (Appellant) (Respondent) Appellant by Mr. R.S. Singhvi and Mr. Satyajeet Goel,CAs Respondent by Mr. Anuj Garg, Sr. DR Date of Hearing 22/05/2023 Date of Pronouncement 18/08/2023 ORDER PER M. BALAGANESH AM: This appeal of the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals)-30, New Delhi, [hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.10475/2019-20 dated 08/12/2021 against the order passed by Ld. Assistant Commissioner of Income Tax, Central Circle-29, New Delhi, ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 2 of 13 (hereinafter referred to as the ‘Ld. AO’) u/s 143(3) of the Income Tax Act (hereinafter referred to as ‘the Act’) on 21/12/2019 for the Assessment Year 2017-18. 2. The assessee has raised the following grounds of appeal:- “1. Whether on the facts and laws and circumstances of the case and in law, the Ld. CITA) ignored the fact that nearly five years after the initial valuations through DCF method, the operations were of started, as observed during the course of assessment proceedings. The company was nowhere near the projections made for the valuation of equity shares to arrive at the premium charged per equity shares. 2. Whether on the facts and laws and circumstances of the case and in law. the Ld. CIT(A) ignored the fact that the company was showing loss continuously as observed during the course of assessment proceedings. 3. Whether on the facts and laws and circumstances of the case and in law, the Ld. CIT(A) ignored the fact that the company was showing loss continuously as observed during the course of assessment proceedings. 4. Whether on the facts and laws and circumstances of the case and in law. the Ld. CIT(A) ignored the fact that the firm M/s Mukul & Ganesh, Chartered Accountants carried out the valuation merely on the basis of information and documents made available to them. No independent investigation had been carried out by them into the activities or the management of the company and no effort had been made to verify the information and the statements that were relied upon by them for the purpose of this valuation. The statement of Sh. Venkatachalam Ganesh of the said firm recorded on 23.10.2019 was compiled in the assessment order establishing the facts. 5. Whether the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.” 3. The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the addition made u/ 56(2)(viib) of the Act in the facts and circumstances of the case. ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 3 of 13 4. We have heard the rival submissions and perused the materials available on record. The brief facts of the issue , arguments advanced by the assessee , show cause notice issued by the ld. AO , replies filed by the assessee and conclusion of the ld. AO are summarized as under:- The Assessee Company a subsidiary company of Dharampal Satyapal Ltd., is setting up a composite project including hotels cum Mall and Cineplex at the Kolkata airport on land taken on a long lease from the Airports Authority of India. The Holding Company had purchased 7,35,813 equity shares (nearly hundred percent of the Assessee Company from Bright Enterprises Private Limited, Jalandhar and from Mr. Ashok Kumar Malhotra, of Gulab Bhavan, Bahadur Shah Zafar Marg, New Delhi at Rs 830 per equity share, including premium of Rs 820 per equity share, and relates to the sale of Hotel Airport Ashok, Kolkata, which was earlier an ITDC property and was sold on disinvestment by the Government of India. Thereafter, all the equity shares were issued by the Assessee Subsidiary Company to the Holding Company at a premium of Rs 820 per equity share, since the value was established on actual purchase of the controlling interest of the hotel company. During ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 4 of 13 the previous year, the Assessee Company allotted 1,29,524 equity shares of Rs 10 each at a premium of Rs 820 per equity share, aggregating to Rs 10,62,09,680. The copy of account of share application money, security premium account and share capital along with intimation sent to the Registrar of Companies in form PAS 3, Board of Directors resolution and the confirmation of the Holding Company Dharampal Satyapal Ltd was duly filed with the Assessing Officer. The Holding Company Dharampal Satyapal Ltd also assessed before the same Assessing Officer, Central Circle 29, is a diversified conglomerate with a turnover of over Rs 5000 crores during the fiscal year 2015 16 and for the assessment year 2017-18 had filed a return of income at Rs.864.50 crore and paid income tax of Rs.157.25 crore. The Assessee Company has discharged the onus by showing the creditworthiness of the Holding Company, and that the transaction is genuine and the payment of the purchase consideration has been made through banking channels and through the internal accruals of the Holding Company. The Assessing Officer has made an addition under Section 56(2)(viib) of the Income Tax Act, 1961 at Rs 4,88,30,548 and assessed the Assessee Company at a total income of Rs 4,81,20,869. This ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 5 of 13 addition is invalid and is not based on any evidence and has been made on conjectures, presumptions and suspicion without bringing any material on record against the assessee. In the first instance, the Assessing Officer had issued a final show cause notice dated October 24, 2019, showing cause as to why the valuation and the share premium of Rs 820 worked out by the valuer, be not rejected. He had based his opinion on the mistaken view that under the Rules, the valuation could only be done by a merchant banker and not by a chartered accountant and wrongfully assumed that valuer did not have any prior experience and no investigation has been carried out by the valuers on the acts or the management of the company, etc. The Assessee Company under letter dated November 21, 2019, explained to the Assessing Officer and justified the valuation made and informed that his presumption that the valuation report could not have been made by a chartered accountant was incorrect as the amendment on the Rules was only made with effect from May 24, 2018 and the chartered accountant was fully competent and had the knowledge and expertise to carry out the valuation as per DFCF method as per the Rules prescribed and that the Department had accepted the same valuation for the ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 6 of 13 assessment year 2013-14 and for assessment year 2016-17. After the reply to the show cause notice as sent originally, the Assessee Company received another show cause notice dated December 14, 2019 wherein the premium amounting to Rs 377 per share was proposed to be disallowed as against Rs 820, as originally in the show cause notice dated October 24, 2019. Absolutely no defect was pointed out in the valuation available on record. The Assessing Officer has for extraneous reasons issued show cause notice to state that substantial additions have been made under Section 148 of the Act, in the case of the holding company for the assessment year 2012-13 under Section 68 of the Act, 1961 and therefore the genuineness of the holding company subscribing to the issued Equity shares was highly doubtful and further, has repeated the same allegation wrongfully that the valuer did not have experience and expertise to carry out, the valuation. The Assessing Officer has wrongly discredited the valuer who is a qualified professional and who has, in a professional manner, based on conservative assumptions, had made the valuation under the DFCF method to arrive at a valuation of premium of Rs.820 and which was found ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 7 of 13 acceptable by the Department for the assessment year 2013-14 and also for the assessment year 2016-17. 5. We find that the ld. AO had observed that high premium charged is on the assumption of future profitability and the potential as well the value of the project ; that after nearly 5 years after the initial valuations through DCF method, the operations have not started yet ; that the company is nowhere near to the projections made for the valuation of equity shares to arrive at the premium charged per equity share ; that the company has been showing business losses continuously from Asst Year 2009-10 onwards ; that the projections made on account of room revenue, cinema, food and beverages, shop rent, profitability , expenditure, cash flow etc were unrealistic and highly exaggerated ; that the genuineness of the holding company M/s Dharampal Satyapal Ltd is in doubt as it was found in the past to be introducing its unaccounted money in its books in the form of accommodation entries from the reputed accommodation entry providers like Mr Praveen Aggarwal and Mr Himanshu Verma and this fact has been accepted by those operators in the statement recorded on oath before the income tax department ; that substantial additions have ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 8 of 13 been made in the hands of M/s Dharampal Satyapal Ltd in Asst Year 2012-13 on the basis of these statements of the entry operators ; that the Chartered Accountant who made the valuation was not registered with any statutory authorities for the purpose of the valuation work and had no prior experience for carrying out the valuation through DCF method; that no independent investigation has been carried out by the chartered accountant and that the estimates and projections given by the management were relied upon by them while performing the valuation; and that the chartered accountant who did the valuation was not a merchant banker. Accordingly, the ld. AO rejected the valuation made using DCF method and proceeded to determine the fair market value of share using Net Asset Value (NAV) Method at Rs 443 per share and disallowed the differential excess premium as income u/s 56(2)(viib) of the Act. 6. The assessee met all the objections of the ld. AO before the ld. CIT(A) by filing detailed written submissions which are reproduced in the order of the ld. CIT(A). The ld. CIT(A) appreciated the contentions of the assessee and granted relief to the assessee by observing as under:- ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 9 of 13 “Ground No. 1: This ground pertains to the addition of Rs. 4,88,30,548/- under sec. 56(2)(vib) of the Act. I have examined the facts of the case, assessment order passed by the Assessing Officer and the written submission filed by the appellant during the course of appellate proceedings. On detailed perusal of the facts of the case and the written submissions filed by the appellant, it is noted that the assessee company is a wholly owned subsidiary of M/s Dharampal Satyapal Ltd. and is setting up a composite project including hotels cum Mall and Cineplex at the Kolkata Airport on land taken on lease from Airport Authority of India. The holding company originally purchased equity shares of the assessee company from M/s Bright Enterprises Pvt. Ltd. Jalandar and Mr. Ashok Kumar Malhotra (hereinafter Malhotra Group), New Delhi at Rs.830 per equity share including premium of Rs.820 equity per shares in 2006. The property earlier belonged to ITDC and was sold under disinvestment scheme by the Government of India. There is no dispute in the fair market value of the shares transacted between M/s Dharampal Satyapal Ltd. and Malhotra Group in 2006, being a third party transaction. As submitted by the appellant, the AO accepted the fair market value of the equity shares of company at Rs.830 per equity shares in the immediately proceeding assessment year i.e. 2016-17 and also in the assessment year 2013-14. The AO did not brought out any material fact on record stating the reason for change of opinion regarding the fair market value of the equity shares of the appellant company from the assessment year 2016-17. 8.1 The AO has challenged the valuation of the equity share by accountant as he was not registered with any statutory authority and also because he was not having any prior experience of valuation of equity shares. As per the provisions of the Rule 11UA, applicable during the year under consideration the assessee had option of getting the fair market value of equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow (DFCF) method. Therefore, there is no legal bar on determination of fair market value of unquoted equity shares by an accountant. The amendment requiring the valuation only why merchant banker (to the exclusion of accountant) was effected from 24.05.2018. In this case the valuation was carried out on 15.03.2015. Therefore, the accountant was qualified to determine the fair market value of share under Rule 11UA. As the Rule does not prescribe any additional experience or qualification, the valuation carried out by the chartered accountants cannot be rejected on the ground of inadequate experience or qualification, once the valuer is a qualified Accountant. 8.2 The AO valued equity shares @Rs.443 per share however no working to arrive at this value has not been mentioned in the assessment order. The valuation made without adopting the methods prescribed under the Rules cannot be accepted. It cannot be based on guess work or mere opinion. The AO has also mentioned that the holding company M/s ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 10 of 13 Dharampal Satyapal Ltd. was found to be engaged in introduction of unaccounted money in their books in the form of bogus accommodation entries from entry provider such as Mr. Praveen Aggarwal and Mr. Himanshu Verma and that substantial additions were made in the income of M/s Dharmpal Satyapal Ltd. in assessment year 2012-13. However, no linkage has been established between purchase of shares of the appellant company by M/s Dharampal Satyapal Ltd. in the year under consideration and introduction of unaccounted money in the books of M/s Dharampal Satyapal Ltd in A.AY. 2012-13. 8.3 In view of the above facts and circumstances, I am of the opinion that the re-valuation of the fair market value of equity shares made by the AQ for addition u/s 56(2)bi is legally not tenable. Therefore, the addition made by the AO u/s 56(2)(b) is deleted and this ground of appeal is allowed.” 7. We find that the holding company was having a turnover of over Rs 5000 crores during the financial year 2015-16 and had filed its return of income for the Asst Year 2017-18 declaring income of Rs 864.50 crores and had paid tax of Rs 157.25 crores. While this is so, we are unable to persuade ourselves to accept to the contention of the ld. DR that the genuineness of the holding company is in doubt. Moreover, we also find that the holding company is also assessed to tax by the same AO who is assessing the assessee. We find that the ld. AO had placed reliance on the conduct of the holding company in Asst Year 2012-13 which is of absolutely no relevance for the year under consideration. Even the saint has got a past. Hence even if the holding company was involved in certain tainted transactions in the past, that does not ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 11 of 13 give them a brand of continuing their tainted transactions in the year under consideration also. Hence the contentions of the revenue in this regard deserves to be dismissed. Moreover, we find that the ld. AR placed a chart before us wherein the shares were issued by the assessee company to its holding company at the same premium of Rs 820 per share which is reproduced hereunder for the sake of convenience :- Assessment Year Number of shares issued Issue price per share (In Rs.) Assessment status 2009-10 6,12,940 830 (Face Value 10 + Premium 820) 143(1) 2010-11 44,542 830 (Face Value 10 + Premium 820) 143(1) 2011-12 2,23,132 830 (Face Value 10 + Premium 820) 143(1) 2012-13 2,83,137 830 (Face Value 10 + Premium 820) 143(1) 2013-14 2,34,722 830 (Face Value 10 + Premium 820) 143(3) 2014-15 2,40,980 830 (Face Value 10 + Premium 820) 143(1) 2015-16 59,036 830 (Face Value 10 + Premium 820) 143(1) 2016-17 42,170 830 (Face Value 10 + Premium 820) 143(3) 2017-18 1,29,524 830 (Face Value 10 + Premium 820) 143(3) 8. As stated supra, the same premium rate per share has been accepted by the ld. AO in Asst Year 2013-14 and 2016-17 u/s ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 12 of 13 143(3) assessments. Hence there is absolutely no need for the ld. AO to take a divergent stand during the year under consideration. 9. In any case, we find that the assessee had duly furnished the share valuation report as per one of the recognized methods prescribed under Rule 11U and 11UA of the Income Tax Rules. The assessee always has the option to choose any of the methods prescribed in the said rules. In the instant case, the assessee had opted to use DCF method for valuing its shares. The ld. AO cannot substitute the same with NAV method on the reason that the projections did not match with the actual and that the projections were unrealistic. All these facts have been duly appreciated by the ld. CIT(A) while granting relief to the assessee. Hence we do not deem it fit to interfere with the findings of the ld. CIT(A). Accordingly, the grounds raised by the revenue are dismissed. 10. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 18 th August, 2023 Sd/- Sd/- (CHANDRA MOHAN GARG) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18/08/2023 Pk/sps ITA No.429/Del/2022 DCIT vs. Kolkata Hotels Ltd. Page 13 of 13 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI